Eight Most Common Candlestick Patterns Every Trader Must Know

What is the candlestick pattern?

Candlestick patterns are the easiest way to see the prices in the market that have changed over a certain period. These patterns used different colors to show whether the price went up or down.
Today, we use this Japanese candlestick pattern in our daily trading and investment.

What do candlestick patterns mean? 

  • When the price goes up, the candlestick is green or white, and the space between the start and the end is called the "real body." On the other hand, when the price goes down, the candlestick is red or black, with a space in between called the "real body."

  • Above the real body, the lines are called shadows or wicks, showing the highest and lowest prices during that time.

  • Candlestick patterns are the best way to understand market modes and predict prices. Some patterns show a bear mood, others indicate bullishness, and some even show uncertainty among the traders.

  • Candlestick patterns are the best for trading or investing in the short and long term. Candlesticks are important trading patterns because many traders rely entirely on candlestick patterns and make their strategies without using other complex indicators.

                                      

How do you read candlesticks for beginners?

There are two major players in the market: buyers, also called bulls, and sellers, who are bears. It is imperative to understand who is dominating the market before making a trade or investment.

                                              

                                                         Bulls and Bears: significant players in the financial market

Here, candlestick patterns are essential in determining the dominance of bulls or bears in the market.

  •  By simply looking at the open-close high and low prices, we can understand the confidence of buyers and sellers and the overall sentiments in the market.

 Candlestick patterns help us determine the following sentiments in the market:

  • Long green candles mean an upper solid trend, and buyers are more active and dominating the market. On the other hand, long red candles indicate powerful downtrends where sellers are controlling the market.

  • Suppose a candlestick has a long upper shadow. In that case, it indicates that the buyer was initially strong, but later, the sellers dominated the market. Conversely, suppose the candlestick has a long lower shadow. In that case, it suggests that the seller initially tried to dominate the market but lost control over buyers.

  • The candlestick with both long upper and lower wick shows that both buyer and seller attempted to dominate the market, but neither one succeeded.

Many such patterns determine the dominance of bulls and bears in the market and are essential to a strategy.

Examples of Candlestick Patterns 

There are two major candlestick patterns: bullish and bearish candlestick patterns.

The bullish candlestick pattern:

Bullish candlestick patterns indicate buyers control the market, and prices will likely increase.
Some of the most common bullish candlestick patterns are-

Hammer pattern: A single candlestick pattern means only a single candle appears in a downtrend. It is a candle with a short body and a long lower shadow. Shadow is at least twice the height of the body. The long lower shadow indicates that sellers tried to dominate the market, but buyers won the game as the price closed near the open. This candlestick pattern suggests a potential reversal in the Trend.

                                         

                                                                                          Bullish Hammer Pattern

Bullish engulfing pattern: It is a two-candlestick pattern that appears in the downtrend. The first candle is small and bearish, while the second is bullish and has an extensive natural body that completely engulfs the first candle. Such patterns show that bearish sentiments are about to end, and bullish sentiments will dominate the market.

                                          

                                                                                 Bullish Engulfing Pattern

Doji Morning Star Pattern: It is a three-candlestick pattern that indicates a reversal in the down Trend. It starts with a long, bearish candle. Another short-bodied candle opens with the gap down, and another long-bodied candle opens with a gap to complete the pattern. This pattern also indicates the change from bearish to bullish sentiments.

                                        

                                                                        Doji Morning Star Pattern

The Bearish candlestick pattern:

The bearish candlestick pattern indicates that the bears are going to dominate the market, and prices may go down.
Some of the common bearish candlestick patterns are

Shooting star pattern: It is a single candlestick pattern that appears in an uptrend. It has a short body and a long upper wick, which is at least twice the size of the body. The long upper shadow indicates that even though the prices have reached a new high, the seller has successfully pushed them down to close near the open. It is one of the most reliable bearish patterns.

                                                
                                                                                  Shooting Star Pattern

Bearish engulfing pattern: It is a two-candlestick pattern that shows the reversal in the uptrend. The first candle is a small, bullish green candle, and the second is a long, bodied red candle that fills the first candle. The bearish engulfing pattern strongly suggests a shift from bullish to bearish sentiment.

                                            

                                                                Bearish engulfing pattern

Dark cloud cover pattern: It is also a two-candlestick pattern that shows a reversal in the uptrend. The first candle is a long, bodied, bullish candle that appears in the uptrend. The second candle opens at the new high but closes below the midpoint of the first candle's body. It shows that sellers significantly pushed prices below the middle of the first candle, representing the bears' psychological wins.

.                                             
                                                                                    Dark cloud cover pattern

How do you know if a candlestick pattern is strong? 

To know if the candlestick pattern is strong, integrate it with other indicators or technical tools like moving average, Bollinger bands, trendlines, or volume.

  • Candlesticks are like raw data of prices, and when you integrate other tools into your analysis and insights, you conclude stronger patterns.

  • Candlestick patterns are the foundation upon which you build a sophisticated trading strategy.

  • Try to make a trendline that represents the overall direction of price. A break or bounce from a trendline can strongly indicate market direction and a price change.

Bottom Line

Candlestick patterns are the financial, technical tools that interpret the price movement on a chart. To use the candlestick pattern for making a trading or investment strategy, it is essential to have a basic understanding of how the candlesticks are formed. Candlesticks represent the open, high, low, and close prize moments of security, derivatives, currency, etc. With a combination of candlesticks or a group of the same-appearing candles, you can predict the price movement and reversal of the Trend.

Suggested Articles:

  1. Consumer Price Index (CPI)

  2. RSI Indicator

  3. Debt to Income Ratio (DTI)

11 Nov, 2023

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